Taking a car home before the deal is done is a bad idea, no matter how much you want to and the dealer encourages you. / David Zalubowski. AP

by By Jayne O'Donnell, USA TODAY

by By Jayne O'Donnell, USA TODAY

It can seem like a great perk: Driving your new or new-to-you car home while a dealer works out the financing.

But it can turn out to be a bad idea.

That's because the terms of the loan deal discussed at the dealership can change to a much higher rate after a buyer takes a car home. Unscrupulous dealers may try to bring buyers back one or more times to sign new, costlier deals - a practice known as "yo-yo financing."

Prodded by state attorneys general and consumer groups, the Federal Trade Commission is considering whether to propose new regulations to address the practice.

The National Automobile Dealers Association said in a statement that it's important for regulators to distinguish between "fraudulent yo-yo financing" and what it calls "legitimate conditional sales or spot deliveries."

NADA calls yo-yo financing "abusive spot deliveries" and says the practice already is illegal in every state because it is deceptive or misleading. In such cases, the dealer acts in "bad faith," such as knowingly quoting a rate that won't be approved for that buyer, failing to say the deal being discussed is conditional and refusing to give back the down payment or trade-in if the deal is not approved.

And those are the exception, said NADA: "Tens of millions of conditional deliveries occur nationwide each year without any hint of problems for consumers."

But Dana Manner, a Miami auto fraud lawyer, says about a third of his practice involves yo-yo financing cases. And Phil Reed, Edmunds.com's senior consumer advice editor, says the shopping service has gotten a "steady stream" of complaints about it for years from people with "mid-tier" credit.

The Center for Responsible Lending told the FTC in 2011 that 27% of people who contacted one of five groups that handle auto finance problems reported being victims of yo-yo scams. More than half of these 590 people had trouble getting their down payment or trade-in vehicle back, or had the dealer threaten legal action against them if the new car was not returned. Most signed new loan contracts at higher rates.

Dealers urge you to take cars home to keep you from going to a rival and to get you used to driving it, says Reed, who wrote a book in 2003 after working undercover as a car salesman.

Dealers argue that they have no interest, however, in putting people in cars they can't afford, in part because the value drops precipitously once a car is driven off the lot. They say they do conditional deliveries to accommodate consumer preferences.

Whatever the reason or however often deals change after customers take cars home, it's clear that dealers aren't the only ones taking a risk. Your trade-in can be sold, down payments lost and use of the newly purchased car could cost you a lot more than you expected if the bad outcomes other consumers have experienced happen to you.

Which means taking a car home before the deal is done is a bad idea, no matter how much you want to and the dealer encourages you. "Dealers want to get you emotionally invested and financially invested in the car," Manner says.

Marv Eleazer, finance manager at Langdale Ford in Valdosta, Ga., says there's responsibility on both sides in what he and NADA say are the rare cases when consumers may be subjected to yo-yo financing.

"During the purchase, customers often get excited with that new-car smell and may not listen or note that the deal isn't finalized, " he says. "It's incumbent upon the dealer to strongly emphasize the car is being delivered subject to final approval with a written notice confirming the terms of the delivery."

How dealer financing works

After dealers run a credit report on consumers seeking financing, salespeople, finance or other managers often estimate what they can offer a person with that credit rating based on how much they put down, the length of the loan and other factors, Eleazer says. If that initial offer is acceptable to the buyer then the process goes a step further for an actual loan approval. Usually, such deals are approved within 15 minutes, he says.

Buyers with low credit scores, however, often get a preliminary offer for financing that might be contingent upon proof of employment or other documentation, and getting these things may take some time. Then, the dealer will shop the loan to various financing sources to get that deal, and the amount of profit they hope to make on it, he says. In the meantime the consumer can take the car on a conditional basis.

But if the consumer has delinquent credit or other issues with their application, the interest rate may be higher than discussed, and the dealer may need to ask for more money down or take less profit.

In such cases, says NADA's chief regulatory counsel for financial services Paul Metrey, signing a new deal "with a dealer in the conditional delivery situation ... is completely optional. Typically, the customer is approved on the terms submitted."

Consumer advocates, however, say that buyers often believe they have little choice but to take a dealer's new, less favorable, offer, especially after they've already driven the car and shown it to family and friends.

The FTC won't comment on its deliberations, but Malini Mithal, assistant director for financial practices, says that because auto purchase and financing is such an "expensive and complicated transaction ... protecting consumers in the auto marketplace remains a top priority for the commission."

How to avoid car financing problems:

1) Know your credit score and what's on your credit report before applying for financing from a dealer or other lender sources.

2) Join a credit union and see what loan amounts, terms and interest rates you can get from there or from other lenders before you go to a dealer to buy a car.

3) Don't bring the car home until it's truly yours - that is, the deal's sealed.

4) Consider renting if you have to have a car before the deal is final.